TRNN Debate: Should The Internet Be Regulated Like A Utility?

The Federal Communications Commission, or FCC, has just voted three to two to move ahead on a net neutrality proposal. One of the core issues in the debate is whether content providers can be charged additional fees by internet service providers to create so-called internet fast lanes to deliver its contents to users.

Here to discuss the FCC's proposal and their visions of how the internet should be controlled and regulated are two guests.

Christopher Mitchell is a national expert on community broadband networks within the Institute for Local Self-Reliance in Minneapolis.

Also joining us is Ryan Radia. Ryan is the associate director of technology studies at the Competitive Enterprise Institute.

WORONCZUK: So, Ryan, let's start with you. What exactly has the FCC put forth in their proposal?

RADIA: Well, today a majority of the FCC, three commissioners, voted for a proposal that would attempt to address a court [incompr.] from earlier this year, when the court of appeals in the District of Columbia reversed a rule that the FCC adopted back in 2010. This is about a concept known as network neutrality. The FCC calls in the open internet order.

What today's ruling would do is impose a few obligations or mandates on the companies that provide internet service to individuals, to homes, companies like Comcast, Verizon, AT&T; also, potentially, wireless companies as well, which include some of the ones I just mentioned. What these rules would do, among other things, is require that internet providers don't block consumers from access of lawful content, that they don't block consumers from engaging in the content applications and services that they desire, and that no degradation occurs--that is, there's no so-called internet slow lane, whereby if you pay for a connection at, say, 10 Mbit/s downstream, some services are throttled by your provider down to, say, half that or less. The rule would also limit to some extent what's known as paid prioritization. That's where a content company and an internet provider strike a deal whereby the content provider pays the internet carrier for what some have described as a fast lane, for access to the last-mile subscribers in a way that's faster than the baseline connection that subscriber is paying for.

It's important to note that despite today's vote, we actually don't have a public rule that the--a notice of proposed rule making the FCC has published. That could take hours, or even days, before the public knows precisely what's in this document, which will be very long and full of legalese. But really, to understand this issue in full depth, you need a document, which we don't have. What we do have, however, are the statements the commissioners and the chairman made today.

Also importantly, this was just the first of what will probably be at least one or several additional votes down the line. This was a notice of proposed rule making, as I said. That means the FCC has put forward a proposal--in fact, a proposal and an alternate proposal, as to how to regulate, essentially, the internet, or at least a large proportion thereof. So over the coming months the public will have an opportunity to comment with the FCC, to submit their written ideas for how the agency should regulate, whether it should follow this approach I just outlined or, instead, another potential which has been suggested, which is to reclassify internet providers as telecommunications service providers, where they can be subject to all sorts of mandates and regulations, perhaps including the ones I mentioned, or perhaps far more.

So this will play out over the next few months, but that's the sort of the gist of what's in the proposal, which, as we'll discuss, some support, although many are skeptical. But I'm skeptical of it, although not for the same reasons that some others are skeptical.

WORONCZUK: Alright. Well, before we get into those reasons, Christopher, do you have the same take on the contents of the proposal?

MITCHELL: Yeah, I think he described it accurately. And the only thing that I think he left out, just because he covered so many different issues (and there are so many different issues to talk about) was transparency, which I think is an important part of the rule, which is, regardless of what happens, the carriers will have to make sure that people know how their connection is being managed. So if there are paid fast lanes, then we'll have to know about that; they won't be in secret.

WORONCZUK: Okay. So let's begin with the interest that various corporations like Amazon and Google and broadband providers have in these FCC regulations. Christopher, who is the winner and loser here, and how would it affect recent deals like that was made between Comcast and Netflix?

MITCHELL: Well, it's an interesting question--and multiple questions.

The first thing is that the chairman has been quite clear that this issue of network neutrality does not impact those kinds of deals that Netflix worked out with Comcast, where the specific area where there was congestion was where Netflix's content goes into Comcast's network. The chairman's been clear that this issue of network neutrality is more of the last mile, sort of in our neighborhoods, where there could be congestion as well. So the Comcast and Netflix deal is going to be dealt with separately.

As far as other winners and losers, I think the winner of all of these things is almost always lobbyists and the lawyers who are going to be arguing it and writing about this sort of thing. I think the big companies like Google, Amazon, Microsoft, that would like to see a good open internet, where they don't have to worry about pay prioritization, in some sense they are winners, because this idea of not having paid lanes have been much more serious. What I'm saying is is that a month ago, when we heard about the rumors of this rule, it seemed that there was obviously going to be paid prioritization and there was not a lot the FCC would do about it. But by talking about reclassification and by asking people whether or not paid prioritization was a good thing, and, if not, how it could be stopped, everyone that does not want to see paid prioritization is in a better situation today than we thought we might be.

WORONCZUK: And, Ryan, in terms of the business interests, do you agree with Chris's take?

RADIA: I certainly agree that lawyers and lobbyists are the biggest winners here, as is often the case whenever government does something complicated, whether it's regulatory or deregulatory.

As for businesses, I think the idea that sort of the well-established content companies stand to benefit from this is actually in many regards true. Notably, Microsoft did not sign on a recent letter that urged the FCC to ban paid prioritization. If you're a household name, like an Amazon or a Google, there's a good case to be made that you don't necessarily need to work with an ISP to cut a deal that lets your content travel that last mile between the ISP's network and the household's home network at a faster rate. And the reason is because folks who want to watch Netflix or YouTube or Amazon Prime Video already know where to go. They're willing to watch that video in high def, even if it means paying a few bucks a month, and even if it means counting it against their monthly broadband usage cap, which many carriers have, although most households don't have to worry about it. But some of the more heavier--the heavier users perhaps grew--homes where, you know, a lot of people who were using broadband might. So the well-established carriers, I can understand in a sense why they are skeptical, why they are skeptical of allowing privatization.

In terms of the losers, you first potentially have the internet service providers themselves. They, I mean, rightly see an opportunity to bolster their revenues, and probably their profits as well, if they can strike these deals. On the other hand, not all providers are as interested in others. Comcast, for instance, has expressed little interest in pursuing these deals, although that may well be because it's trying to strike a deal to merge with Time Warner Cable.

And as far as the losers, I think you need to look at the internet startups. There was this letter--and this will sound confusing--the losers of paid prioritization could actually be the companies that have yet to break into the market. Now, contrary to what venture capitalists think--they're great at business, but I think they may be missing the forest for the trees--if you allow paid prioritization and you allow for upstarts to strike deals that can differentiate their products from the bigger players, there's some opportunity to benefit there.

As far as the transparency rules and the no-blocking rules, I tend to see those as having relatively few losers. I also tend to see those as nonissues in the sense--at least on the blocking side, because the likelihood of a provider, say, blocking a website is pretty low, even if we didn't have these rules. There have been a very small number of instances of this happening, and most of them ended without the government getting involved. It turns out it's bad business to block channels or content that people don't like. That's why on every cable provider and satellite provider of any size, perhaps with tiny exceptions, you can get MSNBC and Fox News. Blocking one is a great way to alienate half or a third of your audience. So on the blocking side you have relatively few losers.

It's really on the prioritization side where you can tailor something a little more creative than what we have today, which is just all bits are transferred relatively equally within the last mile and, in many respects, throughout the internet, although not in all cases.

I think that's the state of play, in terms of who has to stand to benefit from this rule and lose, depending on, again, whether we see a more permissive or a more restrictive approach to paid prioritization.

WORONCZUK: Well, Chris, let's go to the heart of the matter. Is the public interest being defended with the proposal as it stands?

MITCHELL: I think the outcry from the public has been heard loud and clear in the FCC's offices. Chairman Wheeler suffered a lot of abuse. Everyone was reminded of his lobbyist background. I think less clear but equally as important are the number of former lobbyists that are advising him. This has all been splashed across the news, and I think it had an effect. I think we are more likely to see the public interest being met.

The FCC can't just come out and say today, we're going to take this hard action. You know, it needs to take public comment. And the road map that's been set up today certainly moves us in a direction, I think, of meeting the public interest.

And I should say that a lot of these issues around network neutrality, they aren't just locked up in what was discussed today. There's other issues on which I think Ryan and I would agree that if there was more competition in the market, we would see less likelihood of abuses of network neutrality and we would have not as much of a conversation along these lines, because people could just switch providers.

One of the things that Chairman Wheeler has been really good about, I think, is saying that he's going to remove barriers to communities building their own networks. There's a number of states that limit that, so he's moving forward there.

And in other areas, he's really trying to figure out how to make sure there's a few more options.

So those are all different ways in which we can preserve the public interest.

It's most important that everyone has access to an open internet. But I think it's important to recognize that we can get there by moving into multiple policy options, in that any one policy option on its own may not be resilient over time.

WORONCZUK: Okay. Ryan, in your opinion, is the public interest being defended in the FCC's proposal?

RADIA: I think by and large it's not. First [incompr.] in which the FCC's proposal would benefit folks is by essentially duplicating what already is available, both without the loss of the reputational forces, tempered though they may be by the fact that you only have a limited number of options to switch, but also by the baseline expectation the companies can't abuse their market power. Now, those are the antitrust laws, which stand ready to deal with any abuses if they occur.

The problem is that the FCC is continuing down this path that assumes that because an internet provider has some sort of gatekeeper power, which of course they do, that means we need to apply this rigid sort of regulation to them, as if they were the telephone monopoly of decades ago.

The problem is that in the world of internet commerce and communications, you don't just have the carriers; you have the backbone providers, the Cogents and the Level 3s, you have the CDNs, you have the Amazons and the Googles, the companies that actually provide the content and the services that we enjoy, you have the mobile operating platforms--Apple is a big one, as is Google. So every level of the internet you have what I think could be described as gatekeeper situations.

The answer is not to pick one element of that and strictly restrict its ability to transact. What you want is a dynamic, fluid situation where companies can compete to strike deals that allow them to better serve consumers. Maybe that means ESPN pays AT&T so you can get sports on your phone without counting towards your usage cap. Maybe it means that peer-to-peer traffic is degraded, even though some of it is legal. I don't have good answers to all these questions. I'm not trying to run a business here.

What I do suspect, however, is that the FCC is not well situated to resolve these disputes. It's a federal regulatory agency run by lobbyists and lawyers, by and large, who are trying to manage a really fast moving and complex economy that generally is serving consumers pretty well. It's not perfect, but things seem to be getting better on the internet, which is more than you can say about a lot of other areas of our economy from a consumer perspective.

WORONCZUK: So, Ryan, you mentioned this earlier, but during this week, 28 CEOs of the broadcast industry, they issued a letter to the FCC warning them against regulating the internet as a public utility. Now, Chris, I'm wondering, do you think the internet should be regulated as a utility?

MITCHELL: Well, I think the internet is taking on utility-like characteristics, in the sense that everyone expects to have it. A community that doesn't have good access is going to struggle, it's going to wither away, it's not going to see a lot of opportunities to thrive in the modern economy. So it's turning into a utility of sorts.

But when you say regulate it like a public utility, there's no common definition of what that means. But I think what we'd like to see is the FCC regulating it so that a company like Comcast, which is my provider here in Saint Paul, Minnesota, that I really have no other options for high-speed internet access, that they cannot abuse their privilege, in terms of having that monopoly, to decide what kind of sites I can go to. As Ryan noted, blocking outright is unlikely, but it's likely that they would offer the super fast services to some sites at a certain price, in that I may have to pay more or the content provider would have to pay more for me to access those sites over Comcast. So I think if the choice is between regulating like a public utility or letting Comcast do whatever the heck it wants to do, then a public utility looks pretty good, considering I just want to be able to move bits very quickly from my house to everywhere in the world.

WORONCZUK: And, Ryan, what's your take on regulating the internet like a public utility?

RADIA: I think it's a mistake. There is, of course, the question of what is a utility. If by that we mean, is the internet something that most people want or really want and benefit considerably from, sure. I mean, to imagine not having the internet for a few days, let alone a period, is ridiculous to me.

On the other hand, a sizable portion of Americans don't have the internet. They don't want the internet, even though they can afford it (although some want it but can't afford it, which is a separate question). But just because something is really popular and we all want it or most of us want it doesn't mean that you regulate it as a utility. To me the utility-style regulation is really justifiable where it just doesn't make sense economically to have more than one provider. It's just not sustainable. And if that were the case with broadband, then I think that there's a very interesting and difficult debate to have over what we do about regulating it. And I think Chris would be right to support a lot of these rules. And even if there are situations where broadband looks like a utility, maybe there you want to draw some exceptions. But the general rule, I think, should be, wherever there can be competition, even if it's just two companies or three companies, that's generally preferable to utility-style regulation. Of course, there's a spectrum, but utilities are--you look at your power company, for instance, your water company, they are either government-owned or they are private companies who are subject to so many government regulations that they're quasi-governmental entities. The rates they can charge are regulated, so the amount they can price is set by government or the cap. What they provide, the service, their reliability is regulated. These aren't companies that are competitive. They don't have to worry about entering. Your water or power company isn't worried about someone entering, although maybe in the world of solar panels that could change.

On the internet side, the question is: is that a problem? In some communities, perhaps there is a monopoly situation today, but what the data show is that for the vast majority of Americans there are two choices. Now, that may be, say, a 4 or a 6 Mbit downstream DSL provider versus a Comcast, which can provide far higher throughput. Of course that's not the best choice if you're a heavy user, as I am and I'm guessing Chris is and what many of the people watching this are. However, for the majority of Americans, it did--actually does turn out that a Netflix HD stream tops out at 4 to 5 Mbit/s, so a DSL connection might not be so bad if it's priced comparably with Comcast.

Of course, what we want to see is more than two. We'd like to see three or four. I think eight is unfeasible. But in some parts of the country, you do have that kind of choice. In D.C., for instance, a lot of folk can get Comcast, RCN, and FiOS. You've got two cable companies, including [an over builder] and Verizon. All three of those were private investment. They did not benefit in any meaningful regard from special subsidies. They are vying for customers. And that's a situation where you do have competition.

So the question is: can we get that throughout the country? And one answer could be municipal broadband, as Chris would support. To the extent that governments can run broadband networks effectively, that's great. Unfortunately, from, I mean, historical experience, when you have the government trying to provide a private good where competition could also provide it, it's generally better to let competition do it. So if a municipality wants to provide broadband, I would say perhaps providing vouchers to individuals to let them choose the provider, or even precommit, say, giving everyone a $1,000 voucher, and if 10,000 people want to spend a few million bucks, then a company can come in.

To me there are better ways to do that than municipal. But I agree there is a case to be made for greater competition. But a lot of the problem here is local franchise authorities. And I'll finish in a moment.

But if you look at the national broadband map, which--you can Google it--there's a really interesting map where fiber optic broadband is available. Most fiber in the United States is offered by Verizon. They cover about 19 million households, which is a great development. Ideally, they'd build out to their entire network. The investment case hasn't been made yet.

But if you look at the holes, one notable one is Boston, Massachusetts. Everywhere in that area has fiber FiOS to the home, moderately priced, a great competitor to Comcast. I think we all agree with that. The problem is [incompr.] the question is why [incompr.] town said that if Verizon wants to come in, they have to pay not only 5 percent of their gross revenues in fees, which are, by the way, way higher than what it costs in terms of right-of-way, which the provider [incompr.] They also have to commit to building out to 95 percent of the city within--90 or so percent within five years.

In some of the older parts, some of the lower-income parts of the city, that's not economically feasible. Now, again, maybe the answer is to give some subsidies, to give some vouchers. But we need--one answer is the FCC can require localities not to interfere. That to me is a really important way to address this. And there also may be room for looking at what municipalities are doing as well. You do have states that restrict that. Maybe those states' law should be revisited to allow for more competition, although I think we may disagree on the details of how to do that.

WORONCZUK: So, Chris--.

MITCHELL: [incompr.] respond [incompr.]

WORONCZUK: Go ahead. Jump in. Yeah.

MITCHELL: There's been a natural experiment in some sorts, because states have deregulated the--well, they've taken away the ability of local governments to make requirements of cable companies as part of the franchising. We don't see any meaningful difference in investment throughout those states that have taken it away versus those states that still have it. So I think there's a lot bigger issues that are playing out in Boston.

But I think one of the major differences to look at is a friend of mine recently, his neighbor's tree fell across his yard. It took out his electricity line and his cable line. The electricity line was repaired eight hours later on a Sunday. The cable line, he finally got a hold of Comcast, speaking with someone in the Philippines, he was told, and they were going to take two weeks to get someone out there to repair it. And this is the difference right now between a public utility and what we have in sort of a market-based approach.

WORONCZUK: Ryan, do you think that's indicative of one of the differences between kind of a public/private ownership here?

RADIA: Yeah, I do. I think there's a case to be made that if you want a high level of reliability and you don't trust a market to provide that, utility regulation is what you do.

The problem is that in broadband you do have higher liability. It's called a service-level agreement. Lots of businesses, even moderately sized businesses, for $1,000 or $2,000 a month, you can get five-nines reliability. They'll fix it within a few hours, and if you don't, you get a discount. The problem is, if you want to provide that level of reliability in the broadband world, you have a situation where you either need to raise the price or you need to get rid of competition. So the reason the utility can do that is because it's required to have that reliability. It's audited by the government. It comes in. And it's expected to fix downed lines quickly. Sometimes utilities lag, however, in [incompr.] situation of storms and the like. But the reason they can do that is because it's the only game in town. So they [crosstalk] guaranteed rate of return.

MITCHELL: I think the issue ultimately is that there are some areas in which we do see competition if you're a small business, for instance, and in those areas we see much better service than we see in the areas where the cable companies really have carte blanche, like in the residential market. So my answer would basically be that without something really restraining the power of a Comcast Cable monopoly, we need public utility regulation.

WORONCZUK: Okay. Chris, and then, in your mind, what would an ideal internet infrastructure look like? Who would regulate it? Who would own it?

MITCHELL: Well, I think there would be choices for people. And so my organization, the Institute for Local Self-Reliance, as its name might suggest, feels most comfortable if it's owned locally. We prefer the local government to own the infrastructure. Ideally, if the economics work out in that community, it would be open to many different service providers, each offering access and giving people plenty of choices.

Beyond that, I do think that we need to focus on having some competitive pressure. But that's--the biggest fight is over how we're going to get that.

WORONCZUK: Okay. Ryan and what would your ideal internet look like. Who would regulate it, who would own it?

RADIA: Ideally, it would be voluntarily owned. The idea of having 50 percent plus 1 of the public decide how much to invest, what to own, what to allow companies to offer over public infrastructure troubles me. We have it in some respects. I don't think it's the model for the internet.

I'd like to see regulation primarily be focused on, first, holding providers to the promises they make. If they promise you a certain level of reliability or a certain level of throughput or speed, you should get that. If they promise best effort, you should get that too. I also think there's a role for government to play in limited situations where you have these dominant players in certain areas. But I think that should be focused not on sort of a nationwide rule like we see the FCC pursuing, but rather a more locally targeted rule, which may, of course, be federal in nature, that looks at the question of whether you do have a Comcast monopoly in a neighborhood or a region. In situations where you don't have DSL or fiber or anything like that, maybe there's room for some level of regulation temporarily, but you always need to focus on reducing barriers to entry and stimulating investment and competition. That, I think, is the best model forward.